ECB and Bank of Spain Clamp Down on Bank Operations

In a bid to strengthen the banking sector, the European Central Bank (ECB) and the Bank of Spain have imposed new restrictions on bank business and operations.

New Regulations

Under the new regulations, banks are required to:

• Divest activities that pose excessive risks
• Limit variable remuneration
• Use net profits to strengthen their own funds
• Meet specific liquidity requirements
• Adhere to strict administrative procedures

These measures aim to reduce the risk of financial instability and promote confidence in the banking system.

Enforcement Issues

Two key enforcement issues have emerged in recent years:

Promotion of Preferred Shares

Many banks marketed preferred shares as low-risk investments, but they ultimately proved to be high-risk. This led to significant losses for investors and reputational damage for the banks involved.

Execution of Agreements for Hedging Floating Rates

Some banks failed to adequately disclose the risks associated with hedging floating rates, leading to financial losses for investors.

Resolution Planning

To mitigate the risk of bank failures, the ECB and Bank of Spain require banks to:

• Draw up recovery plans, including measures to restore a bank’s financial position in the event of a significant deterioration
• Resolution authorities must draw up resolution plans for each institution, outlining the actions that will be taken in the event of a bank failure

Capital Adequacy

Spanish credit institutions are subject to Regulation (EU) 575/2003 (CRR), which sets out the general prudential requirements for all European credit institutions and investment firms. Under the CRR, banks must:

• Maintain minimum capital adequacy ratios:
  • Common equity Tier 1 (CET1) capital ratio of 4.5%
  • Tier 1 capital ratio of 6%
  • Total capital ratio of 8%
• Make contingent capital arrangements to ensure they have sufficient funds in place to absorb potential losses

Personal Liability

In the event of a bank failure, directors may be held personally liable for any damages caused by their actions. This can take the form of:

• Civil liability
• Criminal liability
• Administrative sanctions

The ECB and Bank of Spain are committed to maintaining a safe and stable financial system, and these new regulations are designed to ensure that banks operate in a prudent and responsible manner.

Conclusion

The ECB and Bank of Spain have taken significant steps to strengthen the banking sector and protect investors. By imposing new restrictions on bank operations and requiring banks to maintain adequate capital buffers, they aim to reduce the risk of financial instability and promote confidence in the system.